[powayseller]

I posted an analysis of Cagan’s paper a few months ago, and pointed out his errors. His biggest mistakes are 1) not understanding that the 2-3% of homeowners who sell set the price for the other 97% – 98% who don’t, and 2) that lenders track LTV, not CLTV, so 100% financing loans which are 80/20, are captured as having 20% equity (80% LTV, but 100% CLTV). If he would correct those two mistakes, his conclusions would be significantly different!

FormerSanDiegan, you are right on! I don’t actually put much credence into Cagan, because he made 2 major errors in an important reseach paper, which ended up misleading many people. Unless you spend hours every day researching this stuff as I do, you wouldn’t know it was complete spin. For the record, I predict our MLS inventory will rise above 50,000 in 3 years, and we will have tens of thousands of foreclosures in San Diego. I expect a banking collapse worse than in the 1990’s. It’s all corroborated in economist John Talbott’s book, Sell Now, a must-read for anyone contemplating whether they should own a house (advice: Sell NOW!).

[powayseller]

Yes, he said “1 million loans will default” back in March.

[powayseller]

I respect Kelly Bennett, I love the Voice of San Diego. They are very good journalists. I’m not sure if she would have interpreted his comments differently, if she had read his other work, as I have. Yes, I did use the wrong verb in insults, and you misspelled “nowhere”. So what?

[powayseller]

Start a thread woodrow – let’s see what you’ve got!

[powayseller]

woodrow, you have lost credibility in my eyes as well, because you prefer insults over debates. I respect people who contribute to a dialogue by starting their own threads or using logic to make a case. Telling someone you are apologizing because they are hypersensitive is passive agressive. No thanks to your apology. But please, start your own thread. I would love to read your opinions and commentaries!

[powayseller]

If the loans won’t default, then there won’t be foreclosures leading to recession, making the entire paragraph nonsense.

Furthermore, if you study the lack of underwriting guidelines out there today, you would wonder why Cagan didn’t say, “About half of those people are going to default”.

[powayseller]

If the illegals were truly a drain, the borders would be enforced. Obviously, they are an economic benefit. If they were made legal, their wages would be legal too, subject to minimum wage and workers comp and unemployment insurance.

What keeps companies from coming to CA? It seems the companies headquartered here, are staying only because their CEO or owner doesn’t want to leave San Diego. How many companies ever move to CA? I hear of companies leaving or shutting down, not moving here. Why?

[powayseller]

I like Chris, and defend him when someone insults him, but in all honesty, I don’t see any insults here. Anxvariety and heavyd have some great questions, and I myself am curious about the answers.

[powayseller]

I wouldn’t read too much into the new homes sales yet. The data is always revised a few weeks later, and the last few months, the revisions have been down. New homes sales consist of contracts signed, and don’t include cancellations. I don’t know if the revised number includes cancellations.

Further, home price sales are cyclical, and one month does not make a trend. The fact is, we have an inventory glut, and months supply is so high, that pricing pressure continues to be downward.

I just found this post by Calculated Risk: “The previous months were all revised down, and the odds are Home Sales for August will be around or under 1 million units when the final estimate is released.”

[powayseller]

I would like nothing more than to get my hands on accurate default rates on Option ARMs. Cagan’s admission that these loans are at risk is a huge admission. He’s the one who published a paper showing that most homeowners have plenty of equity and ride out any housing downturn. I found his change in sentiment significant.

The per capita income in San Diego is nowhere near $70K – $100K. I think less than 20% of families in San Diego make in that income range. So the income premise does not hold.

Most important is this: lenders qualify borrowers at 40% – 55% DTI, based on today’s teaser rate. It doesn’t matter how much money you earn, if you are already maxed out on your mortgage payment and it goes up 50% – 100%, you’re at risk of default. In my opinion, most of the people whose mortgage adjusts up by at least 50% will end up in foreclosure. My reasoning is that they are already maxed out on their mortgage payments.

IF the lenders used traditional underwriting guidelines, and they qualified the borrower on 33% DTI, then your mortgage is max. 28% of your gross income and your total debt payments are a max of 33% of gross income. So the general formula is that you could borrow 3 – 3.5x your salary for a mortgage. If the lenders used the traditional guidelines, they would make sure the maximum interest rate under the loan AFTER the teaser period ends, falls within the 33% guideline.

But that is not happening. This revelation was a surprise to us on this forum when we mutually discovered it earlier this year. We were astonished, “What, the borrower is qualified based on the teaser rate only? Then how does the lender expect the borrower to make the mortgage payment when it jumps 50% or even doubles?” Answer: the lender doesn’t give a damn, ‘cuz he sold the loan to the MBS investor.

So the money is lent w/ a double whammy of risk: at the teaser rate and at up to 55% of income. So the borrower is already at a high debt load in the initial teaser period. He’s basically screwed if he can’t refinance when the teaser period ends.

It’s the lax lending guidelines that are to blame for the wave of defaults we will see.

Remember Casy Serin who got $2.2 mil in loans? This kid barely had a job.

To understand why I am so bearish on housing, you’ve got to understand the lending environment, and how loose it is. Low FICO, one day out of bankruptcy, no problem. Brokers are lying about borrower income, stated income, 0% down, qualifying borrowers on the teaser rate only without regard to whether the borrower can afford the payment after the loan resets….

The lenders have abandoned prudent lending guidelines. It’s all about getting the commission today, and no longer about making sure the loan actually gets repaid. The lender could care less if the damn loan gets repaid. They have the profits today!

Get this: the subprime hybrid ARM has very low payments for 2 years, and then jumps in year 3, with a payment shock of 40% – 50%. Even if the interest rate goes down by 200 basis points, the payment shock is 25%!!!! (Center for Responsible Lending). The panel member at the Senate Hearing said there are 3 main problems with the subprime loans:
1) high debt ratio (50% – 55% of gross income for principal and interest).

2) underwriting to initial payment, so the borrower is qualified based on his ability to pay the temporary low intro rate. When the payment goes up, the FINAL PAYMENTS EXCEED HIS GROSS INCOME!!!!!!

3) borrower’s ability to pay is on principal and interest only. They don’t even include the taxes, insurance, HOA! If you include all that, you could be over 55% – 60% of gross income. That is on the initial teaser rate only.

This degradation of lending is criminal. We’ve got lenders who are selling products for the sake of commission, without a care whether people can stay in their homes.

So don’t waste your time getting mad at me. Get mad at the lenders who have perpetrated the greatest homeowner disaster in our history, basically ensuring that millions of Americans have loans with payments they soon cannot afford. Will not afford. So I will be very clear: in my opinion, millions of Americans will lose their homes in foreclosure because lenders put them in products they simply cannot afford.

If you disagree with me, start your own thread. What do YOU know about the lending environment, and what will be its consequences?

[powayseller]

Off topic, but this is one of the most exemplary political debates I have ever seen. People are stating their arguments and not getting personal, and listening to each other, elevating this discussion and making it a joy to read.

[powayseller]

From the article:
“The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM’s taken out in 2004 and 2005 are at risk of defaulting.”

I did not change my statement, because I still think it is correct. After reading North County Jim’s comments, I read that paragraph a second time, and it still sounded to me like Cagan was expecting these loans to default. How else would we get the “masses of consumers [who] will not be able to afford the new higher payments, setting off a recession risk”?

Yesterday’s rent thread was very impressive in the high standards the posters set for themselves. The impeccable logic used by all sides made the post a pleasure to read, and I learned a lot from it.

[powayseller]

woodrow, I appreciate dissent, and I love a good debate. However, these types of comments are personal and not about the loans at all: ” extremely biased PS is in her analysis, “her credibility is questionable at best”, ” you’re great when you’re not spinning!” So yeah, that sounds a little rude.

sduuude, you are right about the forecasts. Like Roubini, I take existing data to make my analysis. A forecaster takes the data that is out there already, and knows how to craft it into a sensible story. If you read the “bubble bloggers” on the right, you see that they all take existing data and stories, and use it to craft their own analysis. Just to clarify, are you holding me to a higher standard than Nouriel Roubini or Barry Ritholtz?

North County Jim is a model for how to disagree. He often disagrees with me, and he is a perfect gentleman, because he uses logic, so he doesn’t need to let his emotions control him. I really respect people like him, and he exemplifies how we should all behave.

[powayseller]

“The more precariously positioned ARM borrowers are very much on the minds of economists, some of whom fear that masses of consumers will not be able to afford the new higher payments, setting off a recession. According to Christopher Cagan, an analyst with First American Real Estate Solutions, a housing consultancy in Santa Ana, Calif., about 19 percent of the 7.7 million ARM’s taken out in 2004 and 2005 are at risk of defaulting.”

Cagan’s statement is in support of the argument for recession risk in the first sentence. The reason I did not change my mind about what Cagan meant, is because I still think he meant to say 1.5 million ARMs will default, leading to recession. How else can we have “masses of consumers not able to afford the new higher payments, setting off a recession”?

These types of articles are getting more common. Warnings about Option ARMs, and the risk of foreclosure are popping up all over the media. Interestingly, Cagan seems to be one of the only sources of information on how widespread they are. One of the Senate hearing panel members (non-traditional mortgages) quoted him, when asked about exotic loans. None of the panel members quoted a government or banking report. We just don’t have sufficient information on these loans, since most are made in the private market.

[powayseller]

jg, it’s clever to use a different set of variables for the peak vs. the trough. Maybe you could put both models into one post, and explain it so that even dense people like me can understand it, and give the buy and sell dates so we can see how accurate it is.

When you say the actual price trough was in 12/95 at $168K, are you referring to the median price? Median price is a lagging indicator. Or are you using OFHEO data for that?

I think the inputs to this trough may be different from the last time, and I’d like your thoughts on that. I’m thinking of comments by the builders, who say that in past housing downturns, unemployment or high interest rates were the culprit, but this is the first housing downturn in an environment of low interest rates and high employment. We’ve also got a unique lending environment, where someone straight out of bankruptcy is getting a 60% DTI loan, 0% down, stated income, qualified based on the teaser rate, and whose payment can exceed their gross monthly income at reset. How will this unique lending environment affect the trough? Perhaps these loans will show up in the NOD and employment data that you already use.

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